The (Big) problem with RADs
Much of the fear in the aged community around finance - potentially limiting both expenditure and therefore quality of life - stems from a perception that retirees, and self funded retirees particularly, will need to have large amounts of money available should they enter residential aged care. The large amounts of money take the form of Residential Accommodation Deposits or RADs. Even ASIC reinforces the message in this regard, recently arguing that one of the problems with reverse mortgages was that many borrowers might not be left with access to $380,000, "which is the average self-funded upfront cost of aged care for one person".
So, what is the problems with RADs from our perspective and why should most people not focus too strongly on maintaining access to these massive sums?
1. Only a very small percentage of people will actually enter residential age care
"During 2013– 14, 68 per cent of Australians aged 65 years and over lived at home without accessing Government subsidised aged care services, 25 per cent accessed some form of support or care at home, while only 7 per cent accessed residential aged care."
2013- 14 Report on the Operation of The Aged Care Act, p 4
Australians are living longer so its reasonable to assume that we will see an increase in the percentage in residential care - so lets be aggressive and presume it doubles to 14%; that's only 1 in 7 Australians will need access over age 65!
2. You will access any residential care late in life, "won't stay long" and will use only a small portion of any RAD
2016–17 Report on the Operation of the Aged Care Act, p 45
Some might say these figures are depressing; we are not sure that is actually the case for the individuals involved or their families. In any event, and acknowledging that we are dealing with averages, what does a 34.6 month stay amount to in financial terms. Using the $380,000 average RAD figures quoted above you can either pay this as a lump sum to your accommodation provider or a Daily Accommodation Payment (DAP) in lieu. How much would a DAP be in the circumstances:
$380,000 x 5.54% (current July, 2019 MIPR) = $57.68 per day
34.6 months = 1,038 days x $57.68 per day = $59,872
So, even bearing in mind you may not be "average" and instead reside comfortably in an aged care residence well beyond 3 years, and if you have plenty of capital may prefer to pay a RAD rather than a DAP because the implicit interest rate is high, it would be utterly exceptional for you need the full amount of a RAD to pay for your accommodation. The other potential cost is the means tested Care Fee, and the maximum applicable fee is $27,532.59 annually, with a maximum lifetime cap of $66,078.27 as at July, 2019.
An interesting perspective is that the Life Tables published by the ABS (2013) indicate that a man of 82, and a woman of 85, would expect an average life expectancy of 7.5 years and 7.14 years for women respectively. The reason why the average stay in residential care is much shorter is because in many/most situations a move into residential care is symptomatic of declining health.
3. RADs institutionalise inheritances and inter-generational transfers
We do not have a problem with individuals wishing to provide inheritances to their family, as long as they are not at the expense of the retiree's lifestyle and are not an unintended and unfair consequence of retirees believing that they need to retain large amounts of capital for RADs - and with the great majority of that capital then passing untaxed as inheritances to relatives and others.
4. Skyrocketing RADs
RADs seem to be increasing at a rate that well exceeds both inflation and even wages - see the figures below, understanding that RADs replaced accommodation bonds in 2014 - nevertheless it is possible to draw parallels. Whether this is because they are a proxy for real estate prices, or it reflects an intention by providers to provide higher quality and therefore more expensive accommodation, it is not clear.
In any event, if you project forward the rates of RAD increase seen in the last few years prices may double within the next decade. And it is not just the private, for-profit operators that are complicit in this trend, the lower average RADs applying to the not-for-profit (NFP) sector in the chart below, can largely be explained by the fact that those are more active in the regional markets, where RADs are lower.
These figures come from the July, 2018 report of the Aged Care Financing Authority. A lot of attention in that report is directed towards costs trends in age care, but little in terms of RAD inflation. If RADs are considered as a proxy for real estate prices then we would expect to see some reduction in the major Eastern states during 2018/2019 - it will be interesting to see whether that actually plays out in practice!
5. Self Funded Retirees - "Once more to the Well"
Self evidently, RADs can only be paid by individuals with capital, and that means that most of "customers" will be self-funded retirees. Again we have a situation where those who have not adequately prepared or saved for retirement, or have been unable to do so, are caught by the "safety net", and pay nothing in addition to their pension. These individuals don't have as much flexibility as self-funded retirees, but the approach continues to reinforce poor financial habits.
So, what has been happening in practice?
We are not sure that the aged residential care industry always represents a prime example of a transparent, competitive market place in practice and in any event there are good reasons for a very thorough regulatory framework to ensure that the possibility of elder abuse is minimised or eliminated entirely. In any event though, there is currently a very clear trend evident away from paying RADs in favour of DAPs. The Chart below illustrates that in the 3 years period to June 2017 RADs have declined from 43% of total accommodation funding to 38%, largely being replaced by DAPs.
- In the great majority of situations you will not need to put aside the type of capital that RADs suggest in order to cover the care you "might" need in residential aged accommodation.
- We would like to see aged care providers "compete" on the basis of DAPs, rather than quoting headline RADs.
- We would like to see more innovation around catering for "longevity risk" - for example, potentially providing access to tontines. It is patently absurd for most of the retiree population to be worrying about financing residential care accommodation when they will not be customers; removing or reducing this risk would have considerable societal and economic benefits.
- Other alternatives to funding capital costs within the aged care community should to be considered, rather than RADs; this could include participation from the large superannuation funds